James Ashton: The reputation of the City stops with the Bank

Mark Carney’s reaction to the escalating scandal over the manipulation of foreign exchange markets has been the opposite to that of many leaders pressed onto the back foot.

Instead of pledging that deputy heads will roll — often the solution for a boss wanting to shore up his institution and protect his own position at the same time — the Bank of England will soon be rolling in deputy heads.

While not exactly admitting that Threadneedle Street market-watchers had been asleep at the wheel over forex rigging during a marathon grilling by the Treasury Select Committee on Tuesday, the governor’s actions show he believes the Bank should do much better.

Recruiting a fourth deputy — or a fifth, if you count Charlotte Hogg, the Bank’s chief operating officer — specifically to oversee financial markets might appear to outsiders as little more than a headache over who gets the best-appointed office.

But Carney knows he must act decisively, especially after questions over how much the Bank knew about the Libor interest-rate rigging were raised at earlier parliamentary sessions. Disclosures of Paul Tucker’s cosy exchanges with Barclays then-boss Bob Diamond all but ended the deputy governor’s chances of becoming governor.

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London’s reputation as a financial centre does not begin with the Bank — but it ends there. The brewing forex scandal — in which 20 traders have been dismissed or suspended, as well as one of the Bank’s own staff — threatens London’s good name like no other.

New York financiers and politicians did their best to peg Libor failings on London, aided by its title — the London Interbank Offered Rate. But it is a benchmark traded just as frequently on Wall Street as here. Forex, worth $5.3 trillion daily, is a far bigger market. With 40 per cent of its trading taking place here, it is more appropriate to call London home.

Experts say it will also be far easier to pick out wrongdoers among traders who colluded to fix prices when they knew upfront the size of client orders that must be fulfilled. Compared with Libor, the electronic paper trail of who did what and when is far clearer. The losses that hedge funds and pension funds suffered are easier to calculate too. Expect criminal prosecutions as well as hefty fines.

There have already been criminal charges over Libor, after most institutions paid large financial penalties. So the public bloodlust to see bank staff behind bars may yet be sated, except it won’t be those who caused the banking crisis, such as the over-reaching chief executives who built the lenders that toppled over.

If the forex market is so large and relatively easy to follow, why weren’t its failings detected sooner? Once it was clear that Libor was being manipulated left, right and centre, why weren’t other benchmarks examined carefully?

One excuse that regulators often offer up is that they had too much on their plate to do the necessary. After all, Libor concerns can be traced back to 2007, the year everything began to totter. Central banks were busy trying to stop lenders collapsing that year, not picking apart an arcane City measurement.

Another get-out is to say that no one in the Square Mile flagged concerns over forex manipulation to the Bank until last October — even though some worries were raised in meetings with officials as far back as 2006.

Here, the policing of forex falls down. The difference with City regulation post-crisis is that it is meant to be proactive too, not purely reactive. It is why the Financial Conduct Authority carries out probes into such areas as annuities or mobile-phone insurance off its own bat. It is why the Prudential Regulation Authority, which Carney chairs, acts as an early-warning function for banks that might get into financial difficulty, by performing regular stress tests on their balance sheets.

Every time the Bank’s performance is called into question its Court of Directors finds itself in the line of fire. When the Bank got new powers over City regulation and a wider brief for guiding the economy, the Court, the closest thing it has to a supervisory board, was reformed too.

As the Court chairman Sir David Lees told me in an interview recently, it has come a long way from the deferential lunch club he was part of in the Nineties. With these latest questions being asked, I wonder whether it has come far enough.

An oversight committee — which yesterday drafted in Lord Grabiner to investigate any role by Bank staff in forex rate manipulation — dispatches members to sit in on interest rate decision-making, which was previously a closed shop. But it still doesn’t get too near the knuckle. The Court can review the Bank’s activities but always when they are comfortably historic, such as a three-pronged look at its performance during the financial crisis that was carried out in 2012 and pointed out some cultural failings. Anyone waiting for a Court view on the Bank’s quantitative-easing programme will be waiting for a long time.

Change is already in the air at the Bank. In addition to the hunt for a fourth deputy and a replacement for deputy governor Charlie Bean, a new chairman to succeed Lees is around the corner. My spy says the new man is “going to be a surprise, a good one. It’ll be a breath of fresh air, like the Governor”.

We’ll see. In addition, next Tuesday’s strategic review into how the Bank can function better is timely. Maybe the brainboxes at management consultants McKinsey can set Carney and co on the right path.

Banks and insurers are being forced to improve their accountability. When London’s reputation is on the line, it is only right that the City’s top regulator should be forced to do the same. As Carney said on Tuesday, we can’t come out of this with a shadow of doubt about the integrity of the Bank of England.